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Daron Acemoglu – useless “guru” for economy of Armenia: opinion

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Prominent Turkish-American economist Daron Acemoglu, whom Armenia’s new Prime Minister Nikol Pashinyan is going to invite as an advisor, will hardly offer any “miraculous recipes” for Armenia’s economy. So far Acemoglu’s recommendations for post-Soviet countries were commonplace and his basic theory of “inclusive and extractive” institutions ignores many factors essential for real economic development. Improvement of institutions as a universal stimulus for economic growth of countries catching-up development, including in post-Soviet territory, is much spoken of, but leads to economic decline in practice.

In a phone call with Acemoglu, who has already expressed his readiness to assist Armenia in “restoring and developing economy,” Pashinyan assessed him as a “world-known economist.” The 50-year-old Turkish Armenian Daron Acemoglu has repeatedly appeared in ratings of the world’s leading economists. During the recent 25 years, he worked at the Massachusetts Institute of Technology and is one of highly-paid professors there. Nevertheless, a brief review of his ideas is enough to see that they are commonplace and little effective.

The most famous book by Acemoglu co-authored by Harvard Economist James Robertson “Why Nations Fail: The Origins of Power, Prosperity, and Poverty” refers to another intellectual bestseller by Norwegian economist Erik Reinert “How Rich Countries Got Rich ... and Why Poor Countries Stay Poor.” As scientist not specializing in economy, Reinert directly links richness and poorness of countries with their industrial development and warns against free trade, whereas Acemoglu offers quite different solutions for the question economists have been trying to answer since Adam Smith’s time.

The doctrine of Acemoglu and Robertson is based on the difference between the so-called inclusive and extractive economic institutions. Inclusive institutions exist in U.S. and South Korea and contribute to economic growth, improvement of workforce productivity, and prosperity. Extractive institutions, on the contrary, look to “extract maximum income from exploitation of part of society to enrich the other part of society.” Acemoglu lists North Korea and Latin America, Africa and other countries as an example of extractive institutions that lead to stagnation and poverty. Meantime, China is an evident exception and the authors do not deny that economic growth is possible in countries with extractive institutions as well.

It is believed that a good theory must be brief enough to fit one page. From this point of view, the theory of Acemoglu and Robertson is brilliant, but any doctrine claiming the title “theories of everything” eventually comes to nothing in real life.

In fact, ideas of Acemoglu and Robertson about two types of institutions resemble another popular theory about “free” (Western) world and the countries that strive to that world – the West and the Rest theory. Such approach resembles Russian wording “For all the best and against all the worst.” Meantime, the devil is in the detail.

Daron Acemoglu’s articles about economies of post-Soviet area are much more interesting, for instance, Acemoglu’s article dating March 2014 immediately after EuroMaidan in Ukraine. Naturally, Acemoglu considers Ukraine as a post-Soviet economy with extractive institutions unlike Poland, Czech Republic, Slovakia, Estonia, Latvia and Lithuania that “opened their political systems, modernized their economies and achieved a rapid growth within recent two decades” (of course, he does not refer to migration to EU which is comparable to the one from Ukraine). According to Acemoglu, “the Orange Revolution of 2004 promised to usher in a more inclusive society, but the new leaders proved just as corrupt and self-serving as those they had toppled. With the most recent protests, the Ukrainian people have once again tried to overcome corrupt elite. And once again, they are facing a backlash that threatens to halt reform.”

According to him, “in the long run, Ukraine's best bet is to break with its past as quickly as possible. It needs to move away from Russia, politically and economically, even if that means an end to the natural-gas subsidies Russia has used to keep it in the position of a client state.” What happened next to Ukraine was a practical test for Acemoglu’s theory. Breaking its ties with Russia, Ukraine has not created notorious inclusive institutions and once industrial country (under Yanukovych) Ukraine has turned into “great agrarian country,” a mere supplier of raw materials to “inclusive” EU and “extractive” China.

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At the same time, Acemoglu’s analysis of the situation in Ukraine was rather far-sighted. “A first step would be for Ukraine to decentralize and grant more political power to its constituent regions. This would be a partial guarantee that the federal government won't dictate how people in the east or west live their lives, and create a pathway for regional politicians to gain experience for national office,” he wrote in 2014. At that moment, such recommendation was a good shot. At the same time, he asked a question as to whether the politicians and oligarchs that organized EuroMaidan had decentralization on their agenda. The answer is evident – as long as the forces that seized power in Ukraine in February 2014 are still in power, no decentralization is possible. For “the Maidan government” decentralization is equivalent to separatism with all that it entails.

Undoubtfully, Acemoglu will display the same approach to Armenia’s economy if appointed Nikol Pashinyan’s advisor. Here is what he said last April at a conference of USC Armenian Studies Institute: "Armenia could have looked much more like the Czech Republic or Estonia and what we got instead is a country that looks much more like Azerbaijan or Uzbekistan, which is a real shame."

Back to Acemoglu’s most popular book (by the way, Armenia is mentioned there only once in general context along with other post-Soviet economies), the economist writes: “Uzbekistan in many ways looks like a relic from the past, a forgotten age. It is a country languishing under the absolutism of a single family and the cronies surrounding them, with an economy based on forced labor—in fact, the forced labor of children.” Don’t you see similarities with Serzh Sargsyan’s Armenia or Ilham Aliyev’s Azerbaijan? Even the most outspoken critics of Serzh Sargsyan wound not suspect him of benefiting from labor of children.

Comparisons finally turn groundless, suffice it to look at WB Doing Business rating, which an economist like Acemoglu should have known by heart. The Rating authors link investment attractiveness of states with quality of their institutions. The latest edition of Doing Business Rating ranked Armenia 47th, not too far from the Czech Republic that was ranked the 30th. Armenia unlike Czech Republic has no immediate and open borders with EU’s most powerful economy – Germany. Unlike Estonia, Armenia lacks access to the sea. It is useful sometimes to remember about real sector of economy as well – Armenia’s industrial development after post-Soviet devastation is incomparable to Czech Republic, where industrialization was launched yet 400 years ago.

In his speech at the above conference Acemoglu gave very commonplace recommendation for economy of Armenia: to improve government institutions and remove government-related corruption stimuli. Earlier speaking at Yerevan State University in October 2013, he said Armenia’s problem is political, not geographical, cultural or geopolitical and urged the government to be more responsive to citizens’ issues, so that this political process helps Armenia stop being oligarchic.

With Nikol Pashinyan coming to power in Armenia, the above political problem has been resolved certainly. The new “people’s prime minister” has declared anti-oligarchic and anti-corruption agenda, but his stake on the economist telling commonplace things from authoritative tributes will hardly bring desirable results to Armenia’s economy. Recall that Acemoglu used to give very valuable recommendations to Ukraine as well.

Let’s hope that Acemoglu will not give the same recommendation to Armenia. For conclusion, let’s recall Erik Reinert’s best advice to Third World countries: “Don’t do as the Americans tell you to do, do as the Americans did.” Reinert believes that rich counties used to force theories, which they have never and will probably never follow, upon poor states. Therefore, Reinert thinks it important for such countries to look through high theories to see the real life behind them.

Nikolay Protsenko

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31.05.2018

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